What’s Your Options?

Mel Dowdell February 16, 2022

Looking to create a personal budget and get a better grasp on money management, start with these five steps.

Assess And Set A Plan

When it’s the best option: When your collective debt is mounting and you’re no longer able to pay more than the minimum credit card payment each month. If you’re chipping away at your balance by paying only the monthly minimum, your debt will rise over time due to the effects of compounding interest.

What it looks like: The first thing you need to do is to get a clear picture of exactly how much you owe. Make a list of all your debts by creditor, plus the balance, interest rate and monthly due date. This view will help you prioritize and figure out the best payment strategy. Some people start by attacking the balances with the highest interest rates—the higher the rate, the more money you will save by paying the debt off as soon as possible. For others, it makes sense to immediately pay down the smallest balances first, so you can redirect those payments towards accounts with higher balances.

Contact A Credit Professional

When it’s the best option: If you’re behind on payments and need guidance on your available options; You may have maxed out preliminary measures like borrowing from family and friends, and collections agencies are calling.

What it looks like: Because every situation is unique, talking with a credit counselor can give you clarity on how best to tackle your debt. The counselor may negotiate with creditors on your behalf to lower interest rates and waive fees, and they may help you figure out how to rebuild savings. If you decide to enter into a formal debt management program, you may make one monthly payment to the company managing your plan, and they may dole out payments to your creditors.

Negotiate Or Defer

When it’s the best option: Your loan holders may be more amenable to negotiations or forbearance if you ask before you’re in serious trouble. For example, if you can no longer make minimum payments on unsecured debt but think you could manage a less aggressive payment schedule.

What it looks like: While every creditor has different guidelines, you may be able to negotiate on the payment schedule or interest rate for your balance. If you have medical debt, for instance, it helps to proactively seek a payment plan with your medical provider before the first bill is due. Likewise, if you can’t afford the monthly payments on your student loans, you may be able to delay payment through deferment or forbearance.

Consider Debt Consolidation

When it’s the best option: If you have tried negotiating with creditors but they were unable to modify payments, and you have high-interest credit cards carrying balances month to month. It’s also a good idea to do it before your debt-to-income ratio reaches 36 percent.

What it looks like: Debt consolidation, which lets you combine different debts into one payment, might be a good idea if you have several big balances with high interest rates. With the help of a credit counselor or on your own, you may be able to consolidate credit card debt. Or you could look into formal debt consolidation using a personal loan. There are many companies that offer student loan consolidation programs, too.

Research Debt Forgiveness

When it’s the best option: If student loan debt is wearing on your finances and you’ve already consolidated and/or refinanced it, debt forgiveness may be possible. For other types of debt, you may be able to negotiate debt forgiveness as part of a debt settlement agreement, but this option could come with hidden costs and financial risk.

What it looks like: Debt forgiveness generally occurs when a lender agrees to cancel some or all of the debt you owe them, though it often comes with its own set of costs. Nurses, doctors, lawyers, teachers, people who work for nonprofits or for the U.S. government may qualify for different forgiveness programs on federal student loans. There are also income-based repayment plans to research. Forgiveness for private student loans is trickier to come by, however. Likewise, debt forgiveness is not typically a viable option for other types of debt like unsecured credit cards.

Tip: Due to the coronavirus, the U.S. government has provided relief to federal student loan borrowers, allowing most to temporarily stop making monthly payments.